P r a i s e f o r E d w a r d J ay Ep s t e i n ’ s The Big Picture “ One of the virtues of The Big Picture is Mr. Epstein’s astonishing access to numbers that the movie studios go to great lengths to keep secret.... [A] groundbreaking work that explains the inner workings of the game.” —The Wall Street Journal
“ Illuminating.... Startling.... By the time Epstein is through it’s abundantly clear that what we think of as Hollywood is, in accounting terms, a high-stakes hall of mirrors.” —The New York Times
“ Edward Jay Epstein is here to tell us that when it comes to Hollywood these days, we’ve got it all wrong.... Epstein argues, and most persuasively, that we persist in thinking about Hollywood in terms that no longer exist: the ‘dream factories’ that were the old studios—MGM, RKO, Paramount, Columbia, Fox, Universal and Warner Bros.—where movies were the only products, stars and lesser actors were bound to studios by rigid contracts, and theaters were owned by the studios that supplied them…. [Epstein] is a bulldog researcher, he’s brought a great deal of interesting material together and he has interesting things to say.” —Jonathan Yardley, The Washington Post Book World
“ In his adroit charting of the confidence flow between the various entities and eras Mr. Epstein kicks up lots of little surprises…. Edward Jay Epstein is quite good.” —Larry McMurtry, The New York Review of Books
“ Hollywood has needed one of these for a long time—a user’s manual. This one could not be more complete. . . . [Grade] A. Keep it in your car… and you’ll never get lost in this town again.” —Entertainment Weekly
“ I pick no nits with his thesis of a paradigm-dropping shift in the industry.” —William Safire, The New York Times Magazine
“ Mr. Epstein rightly describes Hollywood as a close-knit community with a stronger hold on its employees’ loyalty than any single company within it.” —The Economist
“ …[A] valuable education for those seeking to enter and understand the entertainment industry.... Factually impressive.” —Joel Hirschhorn, Variety
“ [The Big Picture] fascinatingly describes the evolution of the modern marketing- and brand-driven global media giants…. For anybody who is a film buff, The Big Picture will be a fine adventure. But once you learn what goes on behind the scenes, you may never again look at a movie the same way.” —BusinessWeek
“ Epstein peels away the Hollywood facade and gives a nutsand-bolts view of how the six entertainment empires— Viacom, Fox, NBC/Universal, Time Warner, Sony, and Disney—create and distribute intellectual property today…. [He] presents a fascinating look at the unbelievable efforts that must be coordinated to produce a film.” —Booklist
“ In vivid detail, he describes the current process of how a film is made, from the initial pitch to last-minute digital editing. There’s a refreshing absence of moral grandstanding in Epstein’s work. With no apparent ax to grind, he simply and comprehensively presents the industry as it is: the nuts and bolts, the perks and pitfalls and the staggering fortunes that some in the business walk away with. This is the new indispensable text for anyone interested in how Hollywood works.” —Publishers Weekly
“ [A] meticulously reported new book.” —The Baltimore Sun
“ What one learns from these investigations is that the deepest, darkest secrets in Tinseltown have nothing to do with sex, drugs, blasphemy, or politics, and everything to do with money.” —The Weekly Standard
“ Edward Jay Epstein blew the lid off Hollywood’s dirty little open secret.” —The Washington Times
“ Compelling…. [Epstein] demystifies the contemporary process of film-making in the digital age.” —The Pittsburgh Post-Gazette
the h o ll y w o o d economist
Th e H i d d e n F i n a n c i a l Reality Behind the Movies
e d w a r d j ay e p s t e i n
melvillehouse BROOKLYN, NEW YORK
The Hollywood Economist Š 2010 E.J.E. Publications, Ltd., Inc. All rights reserved First Melville House printing: December 2009 Melville House Publishing 145 Plymouth Street Brooklyn, NY 11201 www.mhpbooks.com Parts of this book appeared in earlier form in the New Yorker, Slate, The Wall Street Journal, and the Financial Times. Book design by Kelly Blair Library of Congress Control Number: 2009943414 Printed in the United States of America
Introduction Wh y J o u r n a l i s t s D o n ’ t U n d e r s t a n d H o lly w o o d
There was a time, around the middle of the twentieth century, when the box office numbers that were reported in newspapers were relevant to the fortunes of Hollywood: studios owned the major theater chains and made virtually all their profits from their theater ticket sales. This was a time before television sets became ubiquitous in Ameri-
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can homes, and before movies could be made digital for DVDs and downloads. Today, Hollywood studios are in a very different business: creating rights that can be licensed, sold, and leveraged over different platforms, including television, DVD, and video games. Box office sales no longer play nearly as important a role. And yet newspapers, as if unable to comprehend the change, continue to breathlessly report these numbers every week, often on their front pages. With few exceptions, this anachronistic ritual is what passes for reporting on the business of Hollywood. To begin with, these numbers are misleading when used to describe what a film or studio earns. At best, they represent gross income from theater chains’ ticket sales. These chains eventually rebate about 50 percent of the sales to a distributor, which also deducts its outlay for prints and advertising (P&A). In 2007, the most recent year for which the studios have released their budget figures, P&A averaged about $40 million per title— more than was typically received from American theaters for a film in that year. The distributor also deducts a distribution fee, usually between 15 and 33 percent of the total theater receipts. Therefore, no matter how well a movie appears to fare in the
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box office race reported by the media, it is usually in the red at that point. So where does the money that sustains Hollywood come from? In 2007, the major studios had combined revenues of $42.3 billion, of which about one-tenth came from American theaters; the rest came from the so-called backend, which includes DVD sales, multi-picture output deals with foreign distributors, pay-TV, and networktelevision licensing. The only useful thing that the newspaper box office story really provides is bragging rights: Each week, the studio with the top movie can promote it as “Number 1 at the box office.” Newspapers themselves are not uninterested parties in this hype: in 2008, studios spent an average of $3.7 million per title placing ads in newspapers. But the real problem with the numbers ritual isn’t that it is misleading, but that the focus on it distracts attention from the realities that are reshaping and transforming the movie business. Consider, for example, studio output deals. These arrangements, in which pay-TV, cable networks, and foreign distributors contractually agree to buy an entire slate of future movies from a studio, form a crucial part of Hollywood’s cash flow. Indeed, they pay the overhead that allows studios to stay in business. The
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unwinding of output deals, which started to occur much more frequently in about 2004, can doom an entire studio, as happened in 2008 to New Line Cinema, even though it had produced such immense box office successes as the Lord of the Rings trilogy. Yet, despite their importance, output deals are seldom mentioned in the mainstream media. As result, a large part of Hollywood’s amazing moneymaking machine remains nearly invisible to the public. The problem here does not lie in a lack of diligence on the part of the journalists, it proceeds from the entertainment news cycle, which generally requires a story about Hollywood to be linked to an interesting current event within a finite time frame. The ideal example of such an event is the release of a new movie. For such a story, the only readily available data are the weekly box office estimates; these are conveniently reported on websites such as Hollywood.com and Box Office Mojo, which also attach authoritative-sounding demographics to the numbers. If an intrepid reporter decided to pursue a story about the actual profitability of a movie, he or she would need to learn how much the movie cost to make, how much was spent on P&A, the details of its distribution deal and its pre-sales deals abroad, and its real revenues from worldwide theat-
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rical, DVD, television, and licensing income. Such information is far less easily accessible, but it can be found in a film’s distribution report. (See, for example, the report on Midnight in the Garden of Good and Evil on pages 221-237.) But this report is not sent out to participants until a year after the movie is released, so even if a reporter could obtain it, the newspaper’s deadline would be long past. Hence the media’s continued fixation on box office numbers, even if reporters are aware of their irrelevance in the digital age. This book’s purpose is to close gaps like these in the understanding of the economic realities behind the new Hollywood. In this pursuit, I benefited enormously from the help I received from people inside the industry. I was greatly aided by distribution reports, budgets, and other documents given to me by producers, directors, and other participants in the making and marketing of movies, and I am deeply indebted to several top studio executives who furnished me with the secret MPA All Media Revenue Report for 1998 through 2007 and with studio PowerPoint presentations concerning marketing costs. These documents revealed the global revenue streams of Hollywood films, including the money that flows in from theaters, DVDs, television licensing, and digital downloads.
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I am also grateful for the help I received from the Motion Picture Association, which is the major studios’ trade and research organization, and particularly from Robert Bauer, its director of strategic planning; Julia Jenks, its director of worldwide research and information analysis; and Dean Garfield, its former executive vice president. I further thank everyone who answered my often-pesky e-mails (and my sometimes off-the-wall questions), including John Berendt, Jeffrey Bew kes, Laura Bickford, Robert Bookman, Anthony Bregman, Michael Eisner, Bruce Feirstein, Tara Grace, Billy Kimball, Thomas McGrath, Richard Myerson, Edward Pressman, Couper Samuelson, Stephen Schiff, Rob Stone, and Dean Valentine. I am especially grateful to the very talented director Oliver Stone for casting me in a small part in his Wall Street 2: Money Never Sleeps in November 2009. This bit role allowed me to view the art of moviemaking—and it is an art as well as a business—from a perspective that I would not otherwise have had. I also received an invaluable education in Hollywood law from Alan Rader and Kevin Vick at O’Melveny & Myers, which retained me as an expert witness in the Sahara lawsuit, and from Claude
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Serra of Weil, Gotshal, and Manges. These lawyers helped me understand the art of the deal. I also am indebted to those editors who helped shape this material, including Tina Brown and Jeff Frank at The New Yorker; Jacob Weisberg and Michael Agger at Slate; Howard Dickman, Erich Eichman, and Ray Sokolov at The Wall Street Journal; Mario Platero at Il Sole 24 Ore; and Gwen Robinson at The Financial Times. Finally, I owe a great debt of gratitude to Kelly Burdick at Melville House, who suggested the idea for The Hollywood Economist—and brilliantly edited the book.
Pa r t I Th e P o p c o r n E c o n o m y
Ten Years Ago, I Learned the R e a l S e c r e t i s t h e S a lt
Once upon a time, attending the local movie theater was an experience that most Americans shared on a regular basis. For example, in 1929, the year of the first Academy Awards, an average of ninety-five million people—about four-fifths of the ambulatory population—went to movies every week. There were more than twenty-three thou-
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sand theaters, many of palatial size, like the sixthousand-two-hundred-seat Roxy in New York. In those days, the major studios made virtually all the movies that people saw (over seven hundred feature films in 1929). The stars, directors, writers, and other talent were under exclusive contract, and, in addition, the studios owned the theatrical circuits where first-run movies played. This regime, which allowed the major studios to exert total control over movies, from script to screen, came to be known, and feared, as “the studio system�; it more or less ended in 1950, when the United States Supreme Court upheld antitrust decrees ordering several of the major Hollywood studios to divest themselves of their theater chains. Today, in a world with television, video, the Internet, and other home diversions, weekly average movie attendance is about thirty million, or less than 10 percent of the population. As a result of this diminishment, many larger theaters either closed or divided themselves into smaller auditoriums under one roof. (There are only a third as many theater sites today as there were in 1929, but there are more screens—over thirty thousand.) These multiplexes afforded theater owners significant economies of scale. They could also show a greater variety of films, tailored to different, if
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smaller, audiences. And as smaller theaters closed the chains expanded; today, the fifteen largest North American chains own approximately twothirds of all the screens. These large chains, and their centralized film bookers, are the principal gatekeepers for the American film industry. They are responsible for determining what movies most Americans see. Today a handful of nation-wide multiplex chains account for more than 80 percent of Hollywood’s share of the American box office, and a large share of these bookings are done at ShoWest, the annual event in Las Vegas in which movie distribution and exhibition executives meet over four days to discuss plans for releasing and marketing upcoming films. In 1998, I contacted Thomas W. Stephenson, Jr., who then headed one of these major chains, Hollywood Theaters, and arranged to accompany him to ShoWest. Stephenson was willing to let me tag along to meetings in Las Vegas on the condition that I not directly quote or identify those with whom he met. As part of the deal, he agreed to a Don’t Ask, Don’t Tell protocol in which, unless they specifically asked, he would not identify me as a journalist to the other participants at these meetings with bankers and studio executives.
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On the way to Las Vegas, Stephenson, an energetic, peppery-haired man in his early forties, gave me a quick course in the economics of his business. Of the $50 million customers that paid for tickets in 1997, he said his 450-screen chain, Hollywood Theaters, kept only $23 million; most of the rest went to the distributors. But, he continued, since it cost $31.2 million to pay the operating costs of the theaters, his company would have lost $8.2 million if it were limited to the movie-exhibition business. Like all theater owners, though, he has a second business: snack foods, in which the profit margin is well over 80 percent. And with the snack foods, Hollywood Theaters made a profit of $22.4 million on the sale of $26.7 million from its concession stands. “Every element in the lobby,” Stephenson told me, “is designed to focus the attention of the customer on its menu boards.” When we arrived, he decided to skip the reception hosted by independent distributors. “I personally enjoy watching many of the low-budget films that come from independents,” he said, “but they are not a significant part of our business.” In fact, according to Stephenson, 98 percent of the admission revenues of his theater in 1997 came from the principal Hollywood studios—Sony, Disney, Fox, Universal, Paramount, and Warner Bros.
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These companies supplied his multiplexes not only with films but with the essential marketing campaigns that accompany them. (Occasionally, to be sure, independent films do succeed in winning a mass audience, as, for example, The Full Monty and Slumdog Millionaire did; but, as Stephenson put it, “We don’t count on them.”) Marketing campaigns begin months before the release date, use the most sophisticated methods available to target demographic groups, and intensify their activity in the final week, often with saturation television advertising, in order to capture “impulse” moviegoers. Stephenson and other theater owners rely on them to muster, if not to create, the audience for a film’s crucial opening weekend. The campaigns require massive resources. The major studios spent, on average, $19.2 million in 1997 to advertise each of their films, a sum that would be considerably higher if it included the advertising provided by fast-food restaurants, toy companies, and other retailers in promotional tie-in arrangements that can amount to many times what the studio itself budgets. Rather than attend the large reception, therefore, on our first night we dined with the representative of Coca-Cola, a company that exclusively “pours” the soft drinks in over 70 percent of American movie theaters, in-
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cluding Stephenson’s. Soft drinks are an important part of the movie business. All the seats in Stephenson’s new theater, and most other multiplexes, are now equipped with their own cup holders, a feature that theater executives consider one of the most groundbreaking innovations in movietheater history. With cup holders, customers can not only handle drinks more easily in combination with other snacks but can store their drinks while returning to the concession stand for more food. Hollywood Theaters, which now offers an oversized plastic cup with unlimited refills, sold slightly in excess of $11 million dollars-worth of CocaCola products in 1997, of which well over $8 million was profit. Although most of ShoWest’s official functions take place in convention halls and hospitality suites at Bally’s Hotel, much unofficial business was done in its sprawling coffee shop. It was there early the next morning that I joined Stephenson for a breakfast meeting with an analyst from J. C. Bradford & Co., an investment firm. Acquisitions were in the air; Kohlberg Kravis Roberts had just bought and consolidated two of the largest theater chains. Stephenson, as he made clear at the outset, planned to partake in this industry consolidation by acquiring state-of-the-art multiplexes. Since he planned to finance this aggressive expansion by
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selling part of his company to public or private investors, he needed the services of investment bankers who, in turn, needed a story or convincing rationale, to raise the money. Stephenson’s story centered on stadium seating, in which every row of seats is elevated about fourteen inches above the row preceding it, allowing all customers to have an unimpeded view of the screen. While the seats take up more space, Stephenson said, “Our focus groups show that people now seek out theaters with stadium seating and will drive as far as twenty miles to find one that has it.” Attendance increased between 30 and 52 percent where he had installed such seating. Stephenson would repeat this story to four other investment bankers at similar kaffeeklatsches over the next two days. A little later, Stephenson moved to a different table to meet with two of the top executives of another major chain. He had told me beforehand that he wanted to buy five of their multiplexes and sell them an equivalent number in different locations, or “zones.” In the movie business, the country is divided into zones that contain anywhere from a few thousand to a few hundred thousand people; the major distributors license their films to only one theater owner in each zone. Just over two-thirds of Stephenson’s theaters are in such exclusive zones, and he wanted to increase this
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number. These talks ended inconclusively, and in the late morning I accompanied Stephenson to the convention hall, where we took assigned seats in the grandstands. Stephenson, along with 3,600 other attendees, was there to see the first major studio presentation, Sony’s product reel. Sony’s top executives sat on a dais, as if addressing a shareholders’ meeting. Jeff Blake, the president of Sony’s distribution arm, said that last year Sony films had brought a new record gross into American theaters: $1.2 billion. Indeed, Sony accounted for nearly one out of every four dollars spent on movie tickets in 1997. Vanna White, the television personality then conducted a mock Wheel of Fortune game in which every clue referred to films coming from Sony in the next year, including Godzilla. As Vanna White announced each title, actors from the film in question rushed onto the stage—among them such stars as Michelle Pfeiffer, Julia Roberts, Nicolas Cage, and Antonio Banderas. All of this was followed by excerpts from the films. A highlight of sorts came when the stage suddenly filled with dancers costumed as characters from Sony’s movies. Robert Goulet played the part of Jeff Blake and sang, to the tune of “The Impossible Dream”:
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This is our quest, to be king of the box There’ll be lines round the block When that big hunk Godzilla is finally here And you’ll know what we’ve done for you lately When we beat the unbeatable year. A private meeting held afterward, in Sony’s Las Vegas conference room, was far more grounded in reality. A top Sony executive immediately set the tone by observing that the presentation had cost Sony four million dollars (a gross exaggeration, it turned out) and then quipped that next year, instead of hosting the event, Sony would just send a ten-thousand-dollar check to each of the chains’ film buyers. It became apparent at this meeting that the negotiations did not concern whether a chain would show Sony films on their prescribed release dates; that was taken for granted. At issue was the terms under which they were to be played and positioned against the films of competing distributors, for instance, the number of screens they would be shown on in a multiplex, the guaranteed length of each film’s run, the amount of free advertising there would be in the form of trailers and lobby displays, and the division of the box office receipts.
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For example, regarding Godzilla, the executive outlined the enormous marketing campaign, supported by worldwide licensees of three thousand Godzilla products, as well as promotional tieins with such retail partners as Taco Bell, Sprint, Swatch, Hershey’s, Duracell, Kirin beer, and Kodak, which were designed to drive a huge and voracious audience of teen-age boys to their theaters. This particular audience, as he described it, was not concerned with the quality of the film, or even whether it was in focus, as long as there was action and popcorn. He joked that the theaters’ potential popcorn sales should persuade them to agree to give Sony a larger opening-week cut. Joke or not, the implication was not lost on Stephenson’s film buyer, although for the moment he successfully resisted Sony’s suggestion. (As it turned out, the Godzilla campaign succeeded in “driving” people to pay seventy-four million dollars to see the poorly reviewed lizard in its opening, Memorial Day weekend.) The next private meeting, in the hospitality suite of Twentieth Century Fox, was more relaxed. After offering Stephenson a soft drink, the Fox executive discussed the strategy for the summer season, which provides the largest audience for theaters. Indeed, of the nearly 1.4 billion tickets
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sold in 1997, some five hundred million were for the summer season, when, as the Fox executive put it, “Every day is a school holiday.” (Another two hundred and thirty million were sold in the so-called holiday season, between Thanksgiving and New Year’s.) For the summer release season, Fox was facing competition from a number of catastrophe films, such as Godzilla, Deep Impact, and Armageddon, which early tracking polls showed were attracting the attention of large numbers of male teens. These polls I saw, which were conducted by the National Research Group, had divided respondents into five demographic “quadrants”— under twenty-five, over twenty-five, male, female, and a racial category—and asked about their awareness of, and interest in, upcoming films. On the basis of these data, along with other research supplied by the company, the major studios can avoid simultaneously competing in the same demographic categories and dividing up their opening-weekend audiences. Even in March, the Fox executive reckoned that competitors’ films, particularly Godzilla and Armageddon, would dominate two crucial quadrants—male and under twentyfive—in the early summer. He therefore opted to counter-program, which meant scheduling ro-
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mantic comedies, that would appeal to the female and over-twenty-five quadrants. Although the Fox people had an easier style than their Sony counterparts, they wanted the same limited commodity: the chain’s better screens, play dates, and in-theater advertising. So did the four other distributors Stephenson met with during ShoWest. By his count, in four days he watched brief excerpts from some fifty films. “They all tend to blur together,” he said, and plots were never described. Instead, the accompanying pitches identified them in such jargon as “Clearasil” (coming-of-age), “genre” (teen-age horror), “romantic comedy” (love story), “ethnic” (black characters), “franchise” (the carbon-copy sequel of another film), and “catastrophe” (volcano, comet/asteroid/monster, loud sound effects). The Holy Grail was a film like Titanic, which appealed to all five quadrants. The last and longest meeting was with Disney’s distribution arm, Buena Vista; its senior executives were eager to spend an hour or so discussing marketing plans with Stephenson. While they voiced some concern about the proximity of July’s Armageddon, in which the earth is on a fatal collision path with an asteroid, with Paramount and DreamWorks’ Deep Impact, in which the world is on a fatal collision path with a comet,
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they had an ingenious scheme for differentiating their product. Holding up a rectangular box, their executives explained that it contained a kit that would help theater managers to build a mock asteroid. Disney planned to distribute this package to theaters playing Armageddon and award prizes to theater managers who used it to create the most forbidding cosmic rock. The theme would then be amplified through such stunts as end-of-the world parties hosted by local disc jockeys. Later, Stephenson, along with several of his top executives, toured the trade-show pavilions located in two giant tents behind Bally’s, where delegates to ShoWest were somewhat greedily sampling popcorn, jelly beans, chocolates, licorice, frankfurters, nachos, and other snacks, many of which claimed innovative new flavors and aromas. Others were getting a look at the non-consumable products at the booths, such as loudspeakers, projectors, ticket rolls, cleaning equipment, marquee letters, plastic cups, and remote ticketing systems. As we walked around, one of Stephenson’s associates stopped to try an oversized Wetzel’s pretzel. According to the pretzel company’s representative, the Wetzel’s, though about three hundred calories, would appeal to diet-conscious non-popcorneaters, such as women who wait on the concession
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line with their boyfriends. At this point, one of Stephenson’s top executives, who was assessing different popcorn-topping oil, said to me in a hushed tone that “The real secret is the salt.” As a veteran of the movie exhibition business, he explained that the more salt that a movie theater added to the butter it poured over its popcorn, the more money it made since it drove customers back to the concession stand for drinks—where they buy more popcorn. Stephenson concurred, adding, “We are in a very high-margin retail business.”
Wh y D o M o s t N e w M o v i e Th e at e r s H av e F e w e r t h a n 3 0 0 S e at s ?
The multiplex can be traced back to an otherwise unmemorable shopping center in Kansas City, Missouri in 1963. Its theater owner Stanley H. Durwood split one theater into two “screens,” allowing a single box office and concession stand to service audiences watching two different films. In addition, new automated projectors allowed a single untrained (and non-union) projectionist to run an entire program, including trailers, advertisements, and the movie for multiple screens. The